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FIRTPA is the acronym of Foreign Investment in Real Property Tax Act. Purpose of the act is to address the concern that it would be extremely difficult, if not impossible, to collect income tax from a taxpayer who resides abroad especially if – after the sale – he or she does not own real estate property in the United States anymore.
The seller of real estate property in the United States is a subject to FIRPTA when he is not a US person but a foreign person for tax purposes. The buyer can rely on the affidavit provided by the seller to determine what is the seller’s status, unless the seller has reason to believe that the affidavit is false. A foreign person is a nonresident alien individual, a foreign corporation not treated as a domestic corporation, or a foreign partnership, trust, or estate. Each of those categories need to be examined separately:
A seller who is a US citizen or a US permanent resident/green card holder is exempt from FIRPTA withholding.
If the seller does not have US citizenship or a green card, he can still be considered a US person for tax purposes if he passes the substantial presence test, which consider whether the individual has spent sufficient time in the United States to make him subject to taxation. But how does the substantial presence test work?
The substantial presence test is met when the individual has been in the United States:
Finally, the substantial presence test has its own exceptions. For example, if the person is present in the United States under a F Visa (student visa) he or she will be considered non-US persons for tax purposes and so subject to FIRTPA.
US entities are not subject to FIRTPA. Once again, it will be necessary to determine who is considered to be a US entity.
To be considered as a US person for FIRTPA purposes, a trust needs to pass a two prong test:
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